Barbershop Economics Vol. 1: VAT are we talking about?

The world economy is in ruin. If we look at the United States, Italy, or Greece, we see examples of countries struggling to find jobs for their people, and to control the rising cost of food. In Saint Lucia, bad financial decision-making has punched a hole in the Government’s pockets (and in ours, although we would like to pretend otherwise). In terms of debt reduction and damage control, our leaders have a few options: Loans from the International Monetary Fund (IMF) with harsh demands; a self-imposed economic reform system à la Barbados in the 1990s; or heavier taxation.

A reformed (and heavier) tax regime is our best option for a number of reasons. At the moment, we have an unhealthy dependence on taxes collected on border trade; a situation which will eventually become a financial crisis when our commitments under the Economic Partnership Agreement with Europe come knocking. In the modern world, countries are moving away from collecting tax at the border to “free trade”, and we as small economies have to find new ways to survive.

In that regard, the implementation of a Value-Added Tax (VAT) does one simple thing, and does it very well: it changes the collection of taxes on income to a collection of taxes on consumption. Instead of taking 20 per cent of your salary up front, we now have the opportunity to pay taxes based on what we use. What this does is that it makes the collection of taxes simpler, more comprehensive, and equally distributed. Teachers, bus drivers and persons involved in illegal activities all pay the VAT, which means that the tax-paying public no longer has to worry about bearing the burden of supporting tax evasive citizens. They pay the same 15 per cent on deodorant that we do. Furthermore, there is more latitude for the government to develop social welfare and equal opportunity programmes for the unemployed.

In theory, this type of taxation works. It forces registered businesses to keep better records, collects equal taxes from all citizens, and most importantly, it forces St. Lucians to spend less money. According to government statistics, the average St. Lucian man makes $2,805 a month, and the average woman makes $1982. These figures are not high enough to explain the lavish lifestyles that we struggle to maintain. Our public debt and debt service numbers are extremely high, and continue to climb higher as time progresses. In the annual IMF publications on economic affairs, St. Lucia is described as being on a “dangerously increasing and unsustainable path”. The recommendation for recovery is the implementation of high taxes to reduce excess spending. The implementation of a VAT has made it more difficult for us to spend on frivolities, and forces us to spend on local goods and necessities.

But why are poor people complaining? Because the collection of VAT is regressive. The poor spend a larger percentage of their income on VAT than the rich do. Before you dispute the point, let me remind you that regardless of your perceived social status, there are only two classes of people in most developing countries: the working class, and the bourgeoisie or planter class. More than 80 per cent of employed St. Lucians are considered “working poor”. So…let us ask ourselves some difficult questions: are we willing to squeeze the indigent poor so we can collect taxes from tax evaders and people who make money through illegal means? Can we afford to tighten the noose around the necks of the already struggling working man while the rich continue to walk comfortably through grocery aisles? Maybe not. But we should only complain if we cannot survive comfortably under the new regime. Cigarettes and alcohol count as luxuries, not necessities, so if you used to have a $400 budget for rum and other vices, and now that bill looks like $750, there should be no complaints.

For those of us who drink socially (and sparingly), don’t have a budget for vices and still struggle to put gasoline in our cars and afford groceries, it is time for us to look at some survival tactics. If you don’t have a budget for your salary at the end of the month, that is a major part of the problem. Think about making one and sticking to it as closely as you can. Begin to cut out anything that you can do without, and while you curse the government in your head, remember that by 2029 your children might be dealing with a debt burden of 96 per cent of the country’s total income. This means that for every dollar the country makes, we would have to pay 96 cents back in debt. England is struggling to maintain its economic stability, and the average citizen is taxed mercilessly. If you make more than £35,000 a year, 40 per cent of your salary is gone in tax before you see your paycheck. Dollar for dollar, things are not that bad for us. Park your cars in town and take a bus to work. Walk more, and drive less. Light a fire under the Transport Board so that they can begin to improve the joke we call our transportation system. We have been living beyond our means for years, mes amis, and the time has come for us to learn the hard lessons that much of the rest of the world has already learned.

This is not to say that the new tax system is perfect. We are paying VAT on medication and educational supplies, which should never happen. The unemployed, seasonally employed and indigent poor are further disadvantaged under the VAT system. The complaints from the private sector show a lack of consultation with the relevant persons in key industries. There is a measure of double taxation, since consumption taxes are being collected in addition to the VAT. But, as they say, take heart. With time, revisions and adjustments will be made. We cannot go back, and we cannot stand idly by and watch our dollar slip to $91 to $1 like the Jamaican dollar, or $204 to $1 like the Guyanese dollar. I know I might be oversimplifying the issue, but we cast our votes and we must trust that appropriate measures will be taken. If not, I’ll see you in a few years at the polling stations.

Editor’s Note: This article was edited by Dawnavan Foster. The writer Mr. Dujon has a BSc. in Political Science and Psychology, and an MSc. in International Trade Policy; Mr. Foster has a BSc. in Economics and Law.